If you’re like most Americans, you have some form of debt. And chances are, you already know what you need to do to pay off that debt: either cut back or earn more money. Then take all that extra cash and use it to make extra payments on your debt until it’s gone.
But it gets tricky when you have several different debts to pay off. If you have a student loan, a car loan, and two credit cards, putting a tiny bit of extra cash toward each one won’t do much. To make a real dent in your debt, you need to put all your extra money toward just one debt at a time. But which one should you tackle first?
There are several ways to answer that question. You can pick the debt with the highest interest rate, focus on your smallest debt first, or just apply what you can, whenever you can, to each debt in turn. All of these approaches can work, but each one has its own pros and cons.
The Debt Avalanche Method
When an avalanche strikes in the mountains, it starts at the highest peak and spills downward. The debt avalanche method, also known as “debt stacking,” takes a similar approach.
You start at the peak of your debt mountain: the account with the highest interest rate. Once that’s paid off, you put the same debt payment toward the account with the next-highest interest rate, and so on from there.
Like a real avalanche, this method of paying off debt picks up speed as it goes. Each payment saves you more money than the one before and gets you closer to being debt-free.
Example of the Debt Avalanche Method
Suppose you have four different debts you want to pay off:
- A Mastercard with a balance of $700, a 15% yearly interest rate, and a $15 minimum monthly payment
- A Visa card with a much higher balance of $3,000, a 25% interest rate, and a $90minimum monthly payment
- A 10-year, $8,000 student loan at 4% interest with a fixed monthly payment of $81
- A 5-year, $10,000 car loan at 5% interest with a monthly payment of $189
Currently, your debts are costing you $375 per month. If you continue to make only the minimum payment each month — and you charge nothing else in the meantime — it will take you ten years to become debt-free. Over that time, you’ll pay more than $5,700 in interest.
By pinching pennies, you manage to save up an extra $100 a month. You put it toward your highest-interest loan: the $3,000 Visa bill. That raises your monthly payment to $190. You continue to make low minimum payments on your other loans.
By doing this, you can pay off the Visa bill in about 19 months. With that high-interest loan gone, you take the full $190 you were paying on that debt and apply it to the Mastercard bill. This raises your payment to $205 and eliminates your credit card debt in just a couple of months.
Then you add that $205 to your car loan payment. Paying $294 a month, you wipe it out in another 15 months. And finally, you add that $294 to your student loan payment and pay it off in a year.
Using this method, you can become debt-free in a little over four years. And the total amount of interest you pay during that time will drop to around $2,950 — a savings of over $2,700. All with just an extra $100 a month!
Pros and Cons of the Debt Avalanche Method
The debt avalanche method focuses first on your high-interest debts — the kind that weigh down your budget the most. It’s the fastest way to get out of debt and saves you the most overall. But staying motivated can be a problem.
Pros of the Debt Avalanche Method
Personal-finance experts love the debt avalanche method. They point to its many benefits, including:
- Maximum Savings. A debt avalanche saves you more on interest than any other method. In fact, it’s about the best investment you could possibly make. Paying down debt with 25% interest is like getting a guaranteed 25% return — an unbeatable deal.
- Fast Debt Payoff. By eliminating your highest-interest debt first, you also shorten the time needed to pay off all your debts. The more debt you have, especially high-interest debt, the more this method reduces your payoff time.
- Ongoing Benefits. A debt avalanche can keep working for you when all your debts are gone. Just take the monthly sum you’ve been spending on debt payments and put it into low-risk investments instead. Instead of watching your debt shrink each month, you can watch your nest egg grow — an even more rewarding experience.
Cons of the Debt Avalanche Method
The downsides of the debt avalanche method are:
- It Requires Regular Payments. To maintain the momentum of your debt avalanche, you have to make extra payments regularly. This can be difficult on a tight budget. A single unexpected expense can derail your plans and bring your progress to a halt.
- Progress is Slow. With a debt avalanche, it often takes a long time to pay off your first debt. That can be discouraging, though you may find it easier to stay on track if you use a personal finance app that shows your balance shrinking over time.
- Difference in Payoff Time is Small. If you don’t have a lot of high-interest debt, the debt avalanche method isn’t that much faster than the snowball method. It saves you money, but it doesn’t get you debt free all that much sooner.
The Debt Snowball Method
Imagine you’re building a snowman in your backyard, and you need a big snowball to form the base. The easiest way to do this is to pack a small snowball and roll it along the ground, picking up snow as you go. As you cross the yard, your tiny snowball turns into a massive snow boulder.
The snowball method of debt repayment works much the same way. You start by paying off your smallest debt as quickly as you can. As soon as that debt is gone, you take all the money you’ve been paying on it and add it to the payments of the next-smallest debt.
As one debt after another gets paid off, you keep adding more and more “snow” to your payments. Eventually, you end up with just one big payment each month going toward your final, largest debt.
Example of the Debt Snowball Method
To see how the debt snowball works, let’s go back to our earlier example. You have four debts — two credit cards, a car loan, and a student loan — that cost you a total of $375 in payments each month. And you have an extra $100 per month to put toward one of these debts.
With the debt snowball method, you throw that entire $100 at your smallest balance — the Mastercard — on top of the minimum payment you’re already making. Meanwhile, you continue to make the monthly minimum payments on all your other debts.
By doing this, you can eliminate your Mastercard debt in just six months. As soon as it’s gone, you take the total amount you were putting toward it — $115 a month — and apply it to your Visa bill. Paying $205 a month, you can pay off that balance in 16 months.
Once you pay off the Visa balance, you take that $205 you were paying and apply it to your student loan, boosting your monthly payment to $286. At that rate, you get that 10-year loan paid off in another two years. Then you bump up your car loan payment to a whopping $475, polishing it off in six more months.
Pros and Cons of the Debt Snowball Method
Speaking strictly in dollar terms, the debt snowball isn’t quite as good for your bottom line as the debt avalanche. But for many people, the psychological boost of seeing smaller debts disappear is worth it.
Pros of the Debt Snowball Method
The advantages of the debt snowball method include:
- Instant Gratification. Wiping out your lowest balance quickly gives you an immediate morale boost. Because you can actually see your debts disappearing, you’re more likely to stay motivated and stick to your debt payment plan.
- Fewer Bills to Pay. When you eliminate small debts quickly, you reduce the number of bills you have to pay on each month. That makes bookkeeping easier.
- Easy Setup. With the debt avalanche method, you have to compare interest rates and APRs on your various debts to decide which one to tackle first. With the debt snowball, all you need to know is the total balance.
- Ongoing Benefits. Like the debt avalanche, the debt snowball can also be used as a savings tool. Once you make your last debt payment, you can redirect that big monthly payment into savings or investments.
Cons of the Debt Snowball Method
Despite its psychological perks, the debt snowball has financial drawbacks. They include:
- Higher Cost. With the debt snowball, you focus on the size of the debt rather than the interest rate. That means you hold on to high-interest debt longer, so you pay more interest in total. One way around this problem is to refinance high-interest debts with a debt consolidation loan or balance transfer before starting your snowball.
- Slower Debt Payoff. While the debt snowball method quickly reduces the number of debts you owe, it’s not the fastest way to reduce the total amount of debt you owe. Because you pay more in interest, it takes longer to become completely debt-free.
- Regular, Ongoing Cost. Like the debt avalanche method, the debt snowball requires you to add a large sum to your regular monthly payment. It’s hard to manage if your income and expenses are unpredictable.
The Debt Snowflake Method
Both the debt snowball and the debt avalanche depend on finding extra money in your household budget that you can regularly apply to your debts. But when you’re really strapped for cash, squeezing out an extra $100 per month isn’t always possible.
Still, many people occasionally receive a little financial windfall, such as a tax refund, proceeds from eBay sales, or just a $5 bill discovered in a jacket pocket. With the debt snowflake method, you take all these little sums and put them toward paying down your debt.
Each individual sum is tiny, just like a snowflake — too small to have much effect all by itself. But just as little snowflakes can add up to a big pile over time, these little sums add up to make a big impact on your finances.
Example of the Debt Snowflake Method
Let’s look at our example one more time. You have four debts that add up to $21,700, and you have enough money in your budget to meet the $375 minimum payments on these debts. However, you just can’t find the money to make extra payments every month.
In this situation, you can still use the debt snowball or the debt avalanche method in a limited way. When you finish paying off one debt, you can apply the money from that payment to the next debt. But with no extra money for repayment, you’ll take about six years to pay them all off.
But suppose that during the first week of this plan, you earn $30 babysitting for a friend. Instead of spending it, you make an extra payment on your smallest debt, the Mastercard bill. The second week, you get $15 in shopping rewards and put that toward the Mastercard as well.
During the third and fourth weeks, you find some good sales at the grocery store. Your monthly budget for groceries is $300, but at the end of the month, you find that you only spent $260. That leaves you with an extra $40, so it goes toward the Mastercard debt too.
Each of these little savings, or “snowflakes,” is small. But by applying them all to one debt, you’ve managed to shrink it by an extra $85 in just one month. If you can find similar savings every month, you can pay off all your debts in under five years.
Of course, you can’t count on finding $85 in savings every month. Some months, your little snowflakes might add up to only $50, or $20, or nothing at all. But in other months, you might have bigger windfalls. As long as you keep putting these bonuses toward your debt, they can add up to significant savings in the long run.
Pros and Cons of the Debt Snowflake Method
The snowflake method isn’t a sure thing. It depends on being able to find snowflakes each month and having the discipline to put them toward debt rather than spending them. But its flexibility is a perk if you’re on a tight budget.
Pros of the Debt Snowflake Method
Reasons to choose the debt snowflake method include:
- It’s Flexible. With the snowflake method, you don’t have to set aside a fixed amount every month. You just use whatever small sums come your way. This makes it easier to follow if you’re on a tight budget and can’t make extra payments all the time.
- It’s Less Painful. The snowflake sums you put toward your debt are usually so small that you won’t miss them much. For many people, paying $10 here and $20 there is less painful than parting with a $100 lump sum every month. At today’s prices, $10 can’t even buy a movie ticket, but multiple $10 payments can make a big dent in your debt.
- It Works With Other Methods. You can combine this method with either the debt snowball or the debt avalanche method. For instance, you can set aside a fixed $50 per month for extra payments, then throw in occasional snowflake payments on top of that.
Cons of the Debt Snowflake Method
The snowflake method doesn’t get as much attention from personal finance experts as other methods. Its downsides include:
- Unpredictability. When you set aside an extra $100 a month like clockwork, you know just how fast those extra payments are going to shrink your debt. But with the snowflake method, your payments aren’t steady, and neither is your progress toward debt payoff.
- Can Be Complicated. Making lots of tiny payments isn’t always an option. Some lenders won’t process more than one payment a month, and others charge a fee for extra payments. You can get around this by stashing all your snowflakes in a change jar or a separate bank account and adding them in a lump to your regular monthly payment.
- Requires Discipline. Like snowflakes, tiny sums of money can melt away fast. If you find a $5 bill in your pocket, it’s tempting to blow it on a latte instead of paying down debt. One way to maintain discipline is to collect each day’s extra money in a change jar rather than keeping it in your wallet.
The Verdict: Should You Choose the Debt Avalanche, Snowball, or Snowflake Method?
When it comes to debt, the most important thing isn’t how you pay it off — it’s actually doing it. So the best method to choose is the one that you can stick to most easily. Here’s how to figure out which debt repayment method is most likely to work for you.
You Should Follow the Debt Avalanche Method If…
The debt avalanche method is the best fit if:
- You Have High-Interest Debt. The more high-interest debts you have, the more you gain from choosing the debt avalanche method. It’s the best way to pay off these debts fast and maximize your savings.
- You’re a Numbers Person. If the thing that motivates you most is seeing your debt shrink as quickly as possible, choose the debt avalanche. It maximizes savings and minimizes payoff time.
- You Can Manage the Payments. To use the debt avalanche method effectively, you need to set aside a fixed sum for debt payoff each month. This is easiest if you have a steady income and cash to spare in your budget.
You Should Follow the Debt Snowball Method If…
The debt snowball method is the best fit if:
- You Need Encouragement. If you get a big morale boost from seeing a debt vanish completely, you’re a good candidate for the debt snowball. By providing small victories in the short term, it helps you stay motivated.
- You Want to Simplify. Eliminating some debts early reduces the number of bills you have to pay each month.
- You Can Manage the Payments. Like the debt avalanche, the debt snowball method requires regular monthly payments. It works best for people with a steady income and enough extra cash to set aside for debt payoff.
You Should Follow the Debt Snowflake Method If…
The debt snowflake method is the best fit if:
- Money Is Tight. This method works with even the smallest of sums. If you can only squeeze $10 or $20 out of your budget in a given month, that’s okay. It all adds up.
- Your Income Is Unpredictable. This method doesn’t require you to set aside a fixed amount each month. That makes it easier to manage if your income varies from month to month.
- You Can Make Multiple Payments. It’s easiest to use the debt snowflake method if your creditors allow multiple payments each month with no penalty. If you can only make one payment per month, you can set aside your snowflake payments to add to your next monthly payment. However, it requires discipline to keep your hands off the cash.
In general, the debt avalanche is the best method if you want to shrink your total debt as fast as possible. The debt snowball is best if you care more about eliminating debts and getting them off your books. And the debt snowflake method works best if you can’t manage the regular monthly payments required for the other two methods.
However, there are ways to combine the different methods and get the benefits of each one. For instance, you can start by paying off your smallest debt to get a quick morale boost. After that, switch to the debt avalanche method so you can pay off your high-interest debt quickly.
Alternatively, if you have several small debts, make the one with the highest interest rate your first target. Because it’s a small debt, you get a quick reward, and you also get the savings that come with paying off a high-interest debt.
You can also combine the debt snowflake method with the other two methods. Apply all your snowflake payments to your smallest debt. Once it’s paid off, you’ll free up its monthly payment to put toward your highest-interest debt, starting a new debt avalanche. And you can continue to make snowflake payments as well to chip away at your debt even more.